The New Balance of Power

Do states have any rights in siting LNG terminals?

William A. Mogel and Shuchi Batra

William Mogel is vice chair of the national utility group of Saul Ewing LLP. Contact Mogel at wmogel@saul.com. Shuchi Batra is an associate at the firm. Saul Ewing LLP is a regional law firm with eight offices and nearly 300 lawyers.

Natural gas often is called the world’s most perfect fuel. And since it can be transported as liquefied natural gas (LNG), and, as LNG, is projected to meet 20 percent of the country’s natural-gas requirements by 2025, the construction of onshore LNG terminals is crucial for the United States, which has only 3 percent of the world’s proved reserves of natural gas. 1 Those details notwithstanding, the siting of LNG terminals is contentious as states and a range of stakeholders challenge and seek to frustrate FERC’s permitting authority. It has been observed that:

There are substantial, and in some cases huge, natural-gas supplies outside of North America and Western Europe. The difficulty lies in creating the infrastructure that can make it accessible to consumers. 2

In 2007, two events—a federal court action in AES Sparrows Point LNG v. Smith 3 and a bill 4 introduced in Congress have called into question the states’ role in the siting onshore LNG terminals. The occurrence of these two events is understandable because of citizens’ opposition to major energy projects in their state, but difficult to reconcile in view of the Energy Policy Act of 2005 (EPACT).

AES Sparrows Point LNG v. Smith: The Arguments

Shortly after the passage of EPACT—Pub. L. No. 109-58, 119 Stat. 594—which expressly granted FERC final authority over permitting in Section 311, it was predicted that states would test the limits of the authority granted to FERC:

Although [EPACT] pre-empted state’s powers in some areas, in other areas states have retained powers that directly could affect LNG terminal siting. These powers are not insignificant, but yet also are not well defined. As a result, this lack of definition will continue to spawn litigation in states and localities that are opposed to LNG. Moreover, the uncertainty created by the threat of litigation can jeopardize a terminal’s access to supply and commitments to consumer markets and cause delays that might result in abandonment of a project as market conditions change. 5

Recent events confirm the correctness of this prediction. 6 In this regard, the federal district court decision in AES Sparrows Point LNG dealt with an effort by Baltimore County to use its zoning authority to prevent the permitting of an LNG import terminal in the Baltimore Harbor area. Although recognizing that states and their citizenry have an important place in the debate concerning the siting of LNG terminals, the U.S. District Court in Maryland made clear that state and local governments are preempted from interfering with FERC’s permitting authority, although they may provide input in the federal agency’s decision-making process.

In AES Sparrows Point ,7 the U.S. District Court in Maryland held that the Baltimore County Zoning Regulations that placed limitations on the siting

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